The European Union has agreed to slash carbon dioxide emissions from new cars by 37.5% by 2030.
Under the agreement, emissions from new vans will have to be 31% lower than in 2021.
There was also agreement on an interim target of a 15% cut for both cars and vans by 2025.
Car manufacturers had strongly fought against the move, warning that it could affect jobs.
Vehicle exhaust fumes make up a large share of the emissions linked to climate change.
"With this legislation in place, we are setting the right targets and incentives to tackle emissions from the transport sector," said Commissioner for Climate Action and Energy, Miguel Arias Canete.
"It will help our industry to embrace innovation towards zero-emission mobility and further strengthen its global leadership in clean vehicles."
The deal is a compromise between the demands of states such as Germany, which wanted a cut of 30%, and the European Parliament, which had wanted a reduction of 40%.
The European federation of transport NGOs, known as Transport & Environment (T&E), said it was a step in the right direction but not good enough.
"Europe is shifting up a gear in the race to produce zero emission cars. The new law means by 2030 around a third of new cars will be electric or hydrogen-powered. That's progress but it's not fast enough to hit our climate goals," said Greg Archer, clean vehicles director at T&E.
EU countries are separately considering the extent to which truck emissions should be cut, with a debate due on Thursday.